“We are not in the game of speculating where rates will go.”
That one principle helped us navigate the 2022–2023 interest rate spike while others scrambled to adjust. When the cost of capital shifts dramatically in a matter of months, investors feel it… fast.
What Is Interest Rate Risk?
Interest rate risk is the potential for financial loss due to changes in interest rates. It affects the value of interest-bearing assets — like bonds, loans, and structured debt — and can directly impact both asset pricing and cash flow.
This is not a hypothetical risk. It is very real, especially in a volatile macroeconomic environment.
Why It Matters (Now More Than Ever)
Between 2022 and 2023, we saw firsthand how global economic shifts and geopolitical events can move interest rates quickly and unpredictably.
The result?
- Significant increases in monthly debt service
- Compressed operating margins
- Strained cash flows for rate-sensitive investments
When rates rise suddenly, even a well-performing asset can become cash-flow negative, if the financing is not structured properly.
How To Approach Interest Rate Risk
Rather than trying to time the market or predict central bank moves, it is best to take a disciplined, proactive approach:
1. Lock In Fixed-Rate Debt
Whenever possible, I prefer to lock in fixed interest rates. This provides clarity, consistency, and protection against future hikes (and one less risk for me to worry about).
2. Use Hedging Tools When Fixed Is Not an Option
Not all lenders offer fixed-rate debt. In those cases, one may explore interest rate swaps and caps – financial instruments that help mitigate rate volatility and provide downside protection. [I wrote a more detailed article on this topic. If you’d like a copy, simply reply to the email or send me a message.]
3. Prioritize Cash Flow Resilience
Every financing decision is stress-tested under multiple rate scenarios. If the investment only works at today’s rates, we do not move forward.
Key Takeaways
Whether you are evaluating a new deal or managing an existing portfolio, here are key ways to protect against interest rate risk:
- Lock in fixed-rate debt whenever possible
- Ask your lender about swaps or caps as part of the term sheet (if a fixed rate option is not automatically made available)
- Stress test your monthly debt service against potential rate increases
- Monitor macroeconomic trends, but do not build strategies based on speculation
- Prioritize long-term cash flow over short-term arbitrage
Final Thought
Interest rate risk cannot be eliminated but it can be managed.
In unpredictable markets, your financing structure becomes a competitive advantage. By taking steps to de-risk your exposure, you do not just protect returns – you preserve optionality.
Vessi Kapoulian
Breaking down multifmaily underwriting one step at a time to create educated and empowered investors
P.S.
If you need a second set of eyes on a deal, I am here to help. Send me a message and we’ll schedule a complimentary call.